27 October 2017
Rates & FX Market Update
Markets Interpreted ECB's Communication as Dovish-leaning
¨ Global Markets: The Euro sank after the ECB announced to halve its bond purchases to EUR30bn until September 2018, as we and consensus expected, yet combined with a more dovish and cautious tone than anticipated from its President Mario Draghi which failed to create an upside surprise. The EURUSD broke and closed below our support at 1.1680; as such we turn neutral EUR in the short term watching the next supports at 1.5555 and 1.1455 as markets digest the news and few identified catalysts could push the common currency higher in a near term horizon. On the other side of the Atlantic, the USD got a boost from reported news that the House of Representatives narrowly adopted a budget resolution maintaining the likelihood of tax reform alive. However, the budget process remains complex and political uncertainties could weigh on the outcome of a tax overhaul. Lastly, on the Fed's succession race, Janet Yellen is reported to be out of it. The choice is between Powell and Taylor and we expect a decision to be made before Trump's visit to Asia starting On November 3rd. The nomination of the duo Chair/Vice Chair should limit knee-jerk reactions. In the short term, the DXY could remain bid towards the 95.30 handle should the optimism persist while the 2.48/50% resistance on 10Y UST yield still holds. Today's release of 3Q17 GDP growth and Monday's print on inflation will be closely watched in that sense; remain neutral USD and UST.
¨ AxJ Markets: China sold USD2bn worth of 5y and 10y dollar papers overnight, priced at 15/25bps above Treasuries respectively; spreads subsequently tightened in secondary trading. As China advances in its financial reforms, including opening up its markets, it could attract more inflows into Chinese assets. Over the near-term, we remain watchful of CGB's inclusion into bond indices that could mitigate upward yield pressures; stay neutral CGBs at this juncture.
¨ The USDMYR pair was relatively unchanged overnight, although it ticked marginally higher this morning given USD strength. Ahead of the 2018 budget due later today, a local newspaper reported that the deficit will be lower versus 2017's print (estimated at 3% of GDP). We eye a 2.9% deficit for 2018, with little room for more stringent consolidation ahead of national elections next year. The budget should be neutral or mildly positive for the MYR over the next few trading sessions, and we retain our neutral stance over the near-term, eyeing a 4.22 4Q17 average for the USDMYR pair.
This message is intended only for the use of the person(s) to whom it is
addressed and may contain information that is privileged or otherwise protected
from disclosure. If you are not the intended recipient you are hereby notified that
any use, review, disclosure or copying of this message and the information it
contains is prohibited. If you receive the message in error, please notify the
sender by reply e-mail and discard all its contents.